A myriad of questions continue to surround a video that recently surfaced in which the president of a powerful club of Illinois business leaders said some of the group’s members had actively worked to talk down the state’s bond rating in order to drive up public pressure for pension reform. Progress Illinois takes a closer look at the issue.
A myriad of questions continue to surround a video that recently surfaced in which the president of a powerful club of Illinois business leaders said some of the group’s members had actively worked to talk down the state’s bond rating in order to drive up public pressure for pension reform.
Tyrone “Ty” Fahner, president of the Civic Committee of the Commercial Club of Chicago, a group of corporate CEOs, made his on-camera comments back in March during a speech to the Union League Club of Chicago about the urgent need to reform Illinois' pension system.
The blog Capitol Fax posted the video late last month, and since then, the We Are One coalition has called on Gov. Pat Quinn to help launch a full investigation into the matter. Quinn, however, has been silent on the issue, and his office did not return Progress Illinois’ request for comment. The Civic Committee isn’t commenting either.
Anders Lindall, spokesman for AFSCME Council 31, called Fahner’s on-camera remarks “outrageous,” adding that Illinois taxpayers should be “outraged and demand answers.”
“Here is a group of some of the richest and most powerful corporate CEOs in the state of Illinois who claim to be civic minded and have the best interests of the state at heart, but the president of their lobbying group is bragging about their actions behind the scenes to influence the ratings agencies and drive down the state’s credit rating [and] thereby drive up the costs to taxpayers,” Lindall said.
Dick Simpson, former Chicago alderman and professor of political science at the University of Illinois at Chicago, said unless the executives were using government funds, or whether someone involved had a public, not a private capacity, he doesn’t see offhand how the lobbying efforts would be illegal.
“It would be just like any other citizen talking to any other business,” Simpson said. “If I went and said to a business, ‘Illinois is not a good state to do business [in] right now,’ no one would prosecute me from doing that. It might not be a wise choice, but it’s not prosecutable.”
Here are the comments in question from the video:
Unidentified Questioner: Maybe sometimes you’ve got to be irresponsible to be responsible, and if a political solution really doesn’t produce a favorable outcome, maybe you really need a market solution, and a market solution, I don’t mean bankruptcy, I mean, actually talking down the state rating even further, so the state’s bonds essentially become below investment grade, and it drives up the borrowing costs for the states, and all of us to a significant level enough that you really feel the public pressure. I mean, that’s somewhat irresponsible, but in the end, the rating agencies that can lower sovereign debt, you can see Europe going through the same scramble, is that there has to be a market pressure that is overwhelming. The market pressure is that our bonds, here they’re the 50th rated out of 50 states, but still haven’t gone lower to where they’re actually below investment grade.
Fahner: The Civic Committee, not me, but me and some of the people that make up the Civic Committee, some of the same names I mentioned before, did meet with and call, in one case it was in person, a couple of calls to Moody’s, Fitch and Standard & Poor’s, and say, ‘How in the hell can you guys do this? You’re an enabler to let the state continue. You keep threatening more and more and more, and I think now we’ve backed off, because we don’t want to be the straw that breaks the back, But if you watch what happened over the last few years, it’s been steadily down. Before that, it’s been the blind eye, and that’s a whole different topic, as you know, about how the rating agencies act and don’t act. That’s more in your field and stuff. It has been irresponsible. We have told them that we thought they were being irresponsible, but we stopped that a couple months ago. I do know that we suggested that they talk to the governor, the governor’s staff to see if he could give them comfort on where the state was going, and I think that’s one of the reasons why we’re really close now. I hope we’re close.
The remarks begin near the 47-minute mark of the video, courtesy of the Illinois Channel:
Though the Civic Committee members have recently “backed off” from the credit ratings agencies, according to Fahner, Illinois did experience two credit rating agencies downgrades in the first week of June. Two credit rating agencies downgraded the state's credit following the Illinois General Assembly’s failure during the spring legislative session to pass pension reform that would address the Prairie State’s nearly $100 billion pension debt. The credit changes mean it will cost the state more to borrow money for infrastructure and other projects financed through the bond markets.
Fitch Ratings was first to downgrade Illinois’ credit rating on June 3 from an A rating to an A- rating with a negative outlook. Then on June 6, Moody's Investors Services downgraded Illinois' credit rating, which was already the lowest in the nation, to the lowest level the state has seen from A3 to A2, also with a negative outlook.
"Our rating now assumes the government will not take action to reduce the state's pension liabilities any time soon," Moody's said in a statement at the time. "The legislature's political paralysis to date shows not only the magnitude of Illinois' unfunded benefit liabilities, but also the legal and political hurdles to legislation that would make pensions more manageable long term.”
Neither Moody’s nor Fitch Ratings returned Progress Illinois’ request for comment for this story.
Also due to Illinois’ pension crisis, Standard & Poor’s downgraded Illinois' credit from an A rating to an A- with a negative outlook back in January after the fall veto session.
"The downgrade reflects what we view as the state's weakened pension funded ratios and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions," said Standard & Poor's credit analyst Robin Prunty in a statement at the time.
After the spring session ended, Standard & Poor's is not expected to lower the state’s credit rating further, according to a June 6 statement:
The May 31 outcome was in line with our expectations in January, so the current rating of ‘A-‘ and the negative outlook on the state’s $28 billion of outstanding general obligations bonds are unaffected by the most recent round of pension reform deliberations that kicked the can down the road yet again.
Standard & Poor’s declined to comment for this story, but did point Progress Illinois to factors it takes into account when assigning ratings. The factors include government framework, financial management, economy, budgetary performance, and debt and liability profile.
Like the governor has said, it’s “no surprise” that the two credit ratings agencies lowered Illinois’ rating due to pension reform inaction during the spring session.
“Time and time again, failure to act by deadline has resulted in the bond rating agencies lowering our credit rating, which hurts our economy, wastes taxpayer money and shortchanges the education for our children,” Quinn said in a statement after the recent Moody’s downgrade.
But even so, the government has an “obligation to shine some light” on the Civic Committee’s apparent lobbying of the three main credit rating agencies to ensure no illegal activity occurred and that “these corporate giants didn’t profit in some way by this back-room phone calling,” said Bill Looby, a spokesman with Illinois AFL-CIO.
“This is wrong on a lot of different levels,” Looby continued. “If it’s not illegal, it should be. And we should find out what happened, and who did it, and how it was accomplished, and whether or not there was anyone that benefited from it.”
Overall, Lindall says it is “repulsive” to see Fahner furthering the Civic Committee’s “misinformation campaign” to portray the modest and well-deserved $32,000 average pension of a retired employee as “what’s wrong with state government.”
“It goes much further when it appears that, by their own admission, these tremendously powerful CEOs and lobbyists are working behind closed doors to manipulate the creditworthiness, and therefore the cost to taxpayers of the state and the people of Illinois,” he said.
The Civic Committee’s membership roster includes some of the biggest banks and other financial institutions in the state, Lindall noted. For example, the committee’s Vice Chairman Frederick Waddell is a top executive at the Northern Trust Corporation.
Some other notable members of the Civic Committee include Thomas and Penny Pritzker, Chicago Mayor Rahm Emanuel, who is an honorary member, and Republican candidate for Illinois governor Bruce Rauner.
Mike Schrimpf, Rauner's communications director, told Progress Illinois Rauner was not a part of the lobbying efforts, adding that “Downgrading Illinois’ credit rating costs taxpayers money, and Bruce is all about delivering value for the taxpayers.”
Lindall said the public deserves to know whether any of the executives who talked to the credit ratings agencies were from any financial institutions that serve as bond underwriters for the state, the city of Chicago or other public entities in Illinois that have seen their ratings downgraded.
“Do these underwriters see higher profits in the form of increased fees or any other type of higher profit when the bond rating is decreased,” Lindall asked. “Do the banks’ profits go up when the state bond rating goes down?”
Simpson said if the executives specifically tried to manipulate the state’s rating to make personal profits, then that is illegal, and it’s something the U.S. Securities and Exchange Commission and the U.S. Attorney’s Office could investigate. Simpson, however, said he finds that motive “unlikely.”
In his remarks, Fahner, also a former Illinois attorney general, added that members urged the credit ratings agencies to contact the governor, which Lindall said raises even more questions, including what knowledge the governor’s office had about their lobbying efforts.
Additionally, Fahner is the previous chairman and a current partner at the Chicago-based Mayer Brown law firm, which is the state’s bond and disclosure counsel. Mayer Brown won a two-year contract with the state in September 2011. The state of Illinois pays the firm to serve as its attorney when it goes to the credit markets to offer bonds, Lindall explained.
“Can that firm be carrying out its duties under the law and before the bar to serve its client, the people of the state of Illinois, when a partner in that firm admits to going behind closed doors to act in opposition to the best interests of the people,” Lindall asked.
So far, the unions say they have received no indication of any investigation that has been launched in light of Fahner’s remarks. State lawmakers and other elected officials have also been mum on the matter.
“I don’t know why there’s not more outrage within the elected official ranks,” Looby stressed.
UPDATE 8/7/13: Ty Fahner told Capitol Fax's Rich Miller that he "misspoke" regarding his comments made at the Union League Club of Chicago. Click through for Fahner's full response.